Fed’s Stein: Low Rates Boosting Corporate Bond Risk

By Michael Aneiro

This may not come as a shock, but loose monetary policy might be creating some risks in corporate bond markets. What is a bit of a surprise is the latest person saying this: Jeremy Stein, a member of the Federal Reserve’s board of governors. Here’s Pedro Nicolaci da Costa of Reuters reporting today:

An extended period of low interest rates could create risks to financial stability, and policymakers should keep an eye on junk bond and leveraged loan markets for signs of excess risk-taking, a top Federal Reserve official said on Thursday.

Jeremy Stein, a member of the U.S. central bank’s powerful board of governors, said the current evidence is inconclusive….

Stein’s remarks [at a conference sponsored by the St. Louis Federal Reserve Bank] come at a time when some analysts, including top Fed officials, have raised concerns about the potentially destabilizing effects of the central bank’s unconventional monetary policies, in particular its asset purchase program.

At least we think all of this is what Stein intended to say, as he offers up some delightfully abstruse quotations, even by the lofty standards of Fed-speak. Said quotes herewith (and full speech text here), along with rudimentary attempts to translate them into spoken English:

“In terms of the variables that could be informative about the extent of market overheating, the picture is mixed.” (Rough translation: “Overheating? Tough to say.”)

“If the underlying economic environment creates a strong incentive for financial institutions to, say, take on more credit risk in a reach for yield, it is unlikely that regulatory tools can completely contain this behavior.” (Translation: “As long as we’re enabling them, good luck stopping investors from behaving like investors.”)

“Waiting for decisive proof of market overheating may amount to an implicit policy of inaction on this dimension.” (Translation: “We probably shouldn’t wait for this stuff to blow up before trying to fix it.” Followed by a gratuitous use of the word “dimension.” Remember this sentence should you ever decide to sue the Fed after your corporate bond portfolio tanks.)

You can also read Victoria McGrane and Jon Hilsenrath offer their take on Stein’s speech today in the Wall Street Journal‘s Real Time Economics blog here.